2Q17 earnings jumped substantially by 29% sequentially after it reported a disappointing set of 1Q17 results. Earnings were mainly driven by higher volume growth in 2Q17 coupled with the non-operational tolling fees and CapCon revenues. With the implementation of GCPT, gas price movement risk is now being transferred to end users; thus, it has become a volume play for GASMSIA. The stock remains as MARKET PERFORM with an unchanged target price of RM3.18/DCF share.

2Q17 matched expectations. There was no surprise in 2Q17 results, which saw its core earnings growing 29% to RM42.1m totalling 1H17 core profit to RM74.7m which accounted for 45% of our FY17 forecast as well as market consensus. We expect earnings to pick up further in 2H17 after a slow start in 1Q17. It declared an interim NDPS of 4.0 sen

(ex-date: 14 Sep; payment date: 06 Oct) in 2Q17 which is the same as 2Q16.

Top-line led earnings growth. 2Q17 core earnings jumped 29% QoQ to RM42.1m on the back of 8% hike in revenue to RM1.29b thanks largely to higher sales volume by 5% to c.45m mmbtu from c.43m mmbtu in 1Q17 while CapCon and tolling fees recognised as revenue also increased to RM5.8m and RM9.4m in 2Q17 from RM1.3m and RM3.4m, respectively, that flow directly into bottom-line. Judging from the CapCon, tolling fees and gas volumes, we believe the margin spread was likely lower than RM1.80/mmbtu levels that were achieved in the past 3-4 quarters.

Yearly results also led by volume growth. While 2Q17 core income rose 6% from RM39.7m in 2Q16 attributable to higher volume growth of 12% and higher tolling fee and CapCon revenue, 1H17 core profit fell marginally by 2% to RM74.7m from RM76.6m, partly due to a higher effective tax rate of 24% from 22% and lower CapCon revenue despite higher sales volume by 10% as well as higher tolling fees. On the other hand, revenues for 2Q17 and 1H17 jumped substantially by 32% and 28%, respectively, due primarily to the scheduled half-yearly gas selling price hikes.

Margin spread is certain under GCPT. As the EC had already set a base tariff under the Gas Cost Pass-Through (GCPT) mechanism for the regulatory period of 2017-2019, margin spread has now become certain; hence, it has become a volume play again. On the other hand, the non-regulated businesses, i.e., Virtual Pipeline (VP), Combined Heat & Power (CHP) and BioGNG which just started end of last year, are expected to contribute mildly to the group in the next two years with a meaningful 25%-30% PAT contribution only by 2020.

MARKET PERFORM reiterated. With the GCPT mechanism in place, gas price risks are now being transferred to end users. Nonetheless, with share price rallying 21% YTD, we believe all positives have already been priced in. We keep our estimates and target price of RMl3.18/DCF share unchanged. The stock is retained as MARKET PERFORM and offers a decent yield of >3%. Upside risks to our call are stronger-than-expected sales volume and margin spread.

Source: Kenanga Research - 11 Aug 2017